Reading so many ecstatic laudations on Fed Chairman Alan Greenspan, "thegreatest of all central bankers," two other names and occurrences came tomind. The one was John Law and his tremendous wealth creation throughrigorously inflating the share prices of the Mississippi Company. And theother was former Fed chief Paul Volcker and his recent article in theWashington Post titled "An Economy On Thin Ice," wherein he expressed hisdesperation about the economic and financial development in the UnitedStates. Though he never mentioned his successor's name, it was all abouthim and his policies.

Just a few samples from Paul Volcker's assessment:

Under the placid surface, there are disturbing trends: huge imbalances,disequilibria, risks - call them what you will. Altogether, thecircumstances seem to me as dangerous and intractable as any I canremember, and I can remember quite a lot. What really concerns me is thatthere seems to be so little willingness or capacity to do much aboutit...

I don't know whether change will come with a bang or a whimper, whethersooner or later. But as things stand, it is more likely than not that itwill be financial crises rather than policy foresight that will force thechange.

What, after all, are the great merits of Mr. Greenspan, according to theconventional laudations? They are, actually, seen in two different fields:first, in the striking successes of his actual policies; and second, innotable contributions to both the theory and practice of monetary policy.

His policy successes seem, indeed, all too conspicuous: lower inflationrates than expected despite strong GDP growth; high gains in job growth;and low rates of unemployment. And yet only two mild recessions, of whichthe second one, in 2001, was so mild that it disappears when quarterlydata are aggregated to a year.

His extraordinary successes are generally attributed to radically newpractices in monetary policy. The Financial Times ran a full-page articleunder the big headline "Greenspan's Record: An Activist Unafraid to DepartFrom the Rule."

To quote the paper presented by Alan S. Blinder and Ricardo Reis ofPrinceton University at the Federal Reserve Bank of Kansas City symposiumon this point: "Federal Reserve policy under his chairmanship has beencharacterized by the exercise of pure, period-by-period discretion, withminimal strategic constraints of any kind, maximal tactical flexibility atall times and not much in the way of explanations."

It is true Maestro Greenspan disregarded any established rules in centralbanking. To escape the consequences of the equity bubble that he createdin the late 1990s, he generated a whole variety of new bubbles thatradically changed the U.S. economy's growth pattern. What he achieved wasthe greatest inflation in asset prices in history, which became theeconomy's new engine of growth. What about its inevitable aftermath?

If Alan Greenspan jettisoned all inherited rules, he nevertheless choseone predominant rule, actually, his only rule: a strictly asymmetricpolicy pattern. Every central bank has two policy levers at its disposal.The big lever is changing bank reserves, the banking system's liquiditybase. The little lever consists in altering its short-term interest rate.

Whenever monetary easing appeared opportune, Mr. Greenspan has actedrigorously with both levers. When it seemed to require some tightening, healways acted hesitantly and only with his little interest lever. He hasnever seriously tightened bank reserves. Though hard to believe, he hasactually been easing the Fed's reserve stance since last May.

This is most probably occurring because the continuous rampant creditexpansion is increasing the banking system's reserve requirements.Nevertheless, to keep the federal funds rate at its targeted level of 4%,the Fed has to provide the higher reserves.

What this means should be clear: The Fed is anxious to avoid any truemonetary tightening in the apparent hope that the "measured" rate hikeswill softly do the job over time, causing less pain. Most probably,though, this implies more rate hikes and more pain - later.

It was, as a matter of fact, precisely the same kind of experience thatinduced Volcker to abandon such strict funds rate targeting in October1979 in favor of targeting bank reserves. It marked the fundamental dividein U.S. monetary policy from prior persistent monetary looseness and astrong inflation bias to genuine credit tightening, ushering in a seculardecline in the inflation rates.

The Greenspan Fed has returned to dubious interest targeting, whileexplicitly restricting itself to "measured" - in other words, very slow -rate hikes. The true monetary ease shows in the continuance of therelentless credit deluge.

When Alan Greenspan took over as Fed chairman in 1987, outstanding U.S.debts totaled $10.57 trillion. According to the latest available data,they stand at $37.35 trillion. This is definitely Mr. Greenspan's mostconspicuous achievement.

To escape the aftermath of the equity bubble, the Fed created the housingand bond bubbles in 2001 and the following years. It is time, we think, toponder the aftermath of these two asset and credit bubbles. The invertingyield curve is primarily threatening the huge existing carry-trade bubblein bonds. But the big housing bubble and the smaller car bubble too haveplainly peaked. Rising interest rates and poor income growth arerelentlessly taking their toll.

It should be immediately clear that the potential economic and financialaftermath of a bust of these bubbles will be many times worse than thepotential aftermath of the earlier equity bubble. Spending and debtexcesses have multiplied over the past four to five years to an extentthat threatens the stability of the whole U.S. financial system.

Lately, Mr. Greenspan's public speeches have insinuated that the highasset prices in the United States in recent years may, ironically, be dueto the extraordinary success of his policies, by leading investors todemand lower risk premiums. Eventually, however, this reverses and assetprices fall reflecting "the all-too-evident alternation and infectiousbouts of human euphoria and distress and the instability they engender."

Yet he emphasized that it is "simply not realistic" to expect the Fed toidentify and safely deflate asset bubbles. The right response in his viewis for all policymakers to keep markets as flexible and unregulated aspossible. Flexible markets, he said, helped absorb recent shocks, such asstock-bubble collapse and the Sept. 11, 2001, terrorist attack.We are not sure what shocked us more, this senseless, arrogant remark orthe complete silence on the part of American economists. Exuberance, justby itself, is unable to inflate asset price levels. The indispensableprimary condition is always credit excess, and Mr. Greenspan deliveredthat in unprecedented profligacy. By the nature of things, loose money andcredit excess lead, and exuberance follows.

America's reported economic recovery since 2001 has been its weakest byfar in the whole postwar period. For the working population, there neverwas a recovery. They speak euphemistically of a shortfall of employmentand income growth. It is better described as a fiasco for both.

Two acute dangers presently lurk in the U.S. economy and its financialsystem. One is the inverting yield curve threatening to pull the rug outfrom under the huge carry-trade bubble in bonds, and thereby from underthe housing bubble. The other is the slump in consumer spending. Consumerborrowing is slowing, while employment and labor income growth areweakening again.

It seems that the carry-trade community is betting on prompt rate cuts bythe Fed if something goes wrong in the economy or the financial system. Wesuspect that the Fed, grossly underestimating the enormous vulnerabilitiesin both sectors, will stick to its rate hikes. The interest "conundrum" ispretty much the only thing holding up this house of cards.

"Super-liquid markets" has become the common bullish catchphrase. Itshould be realized, however, that the existing liquidity deluge in theUnited States and some other countries has its sole source in themonstrous asset bubbles providing the collateral for virtually limitlessborrowing. It needs a sharp distinction between earned liquidity fromsaving and borrowed liquidity accrued from asset bubbles. The latter kindof liquidity can vanish overnight.

The sharp surge in inflation rates is forcing the Fed to continual ratehikes. Doing so, it takes enormous risks with the existing bubbles.Bluntly put, it has lost control.

Sunday, December 11, 2005

SteveZ Ghost of Xmas past?Gone but not forgotten?End of 2005 Tax break to repatriate foreign earnings at only 3% gave dollar support as foreign currencies had to be sold, soon to end.Double US deficits not shrinking, near $1.2 trillion 2005.Also March could be end to int rate hikes......also $$ supportive......but gold has risen even as $$ has!!March ends reporting of M3. March begins Iran Euro Oil trading.......so I wonder as Bernanke steps in with liquidity flair.......that's why I am thinking gold bull wants to shake off as many weak hands before WILD phase begins....good sign if it stays above $50.We see now steveZ as we were the few that screamed of bear's arrival near 2000........we also should have been screaming about the gold bull's beginning.......lessons of past 5 years worth a lifetime.Somtime down the road my friend.....as maybe the Dow has one more gasp to above 11K before table is set yet once again.......few voices see trouble ahead as before....Housing is INDEED slowing and over 800K jobs at risk.....been the backbone of economy.....not sure what could step in....lowering rates hat trick will have less of an effect and could do double damage to US dollar.....another positive for gold.....and not even a whisper for deflation.....

Thursday, December 08, 2005

My orig buy was $2.55. Stock closed at $3.23 today before earnings. UP on higher volume. Price following volume. A good sign. Near my orig target area, I will monitor reaction to earnings, if true there is HUGE 9M short position,what if they get pressure to cover?

Starting to add up IMHO, TOL warns and lowers 2006 guidance. MSFT in India to hire 3,000 workers and invest $1.5 B there, the SHIFT continues.GM near the brink. Gold at $520. Housing declining could strip as many as 800,000 jobs. Interest rates near inversion.High energy leads to Recessions. BOJ signals END to zero rate policy sees inflation!!!!! NIKK falls 300 points at 93% bullish sentiment top is in there IMHO

Monday, December 05, 2005

Oil Price To Stay High On Upside Risks Oxford Analytica, 12.05.05, 6:00 AM ET Oil prices have fallen from post-hurricane highs this year. If market oversupply materializes, they will continue to fall. However, risks on the upside are more likely to prevail in 2006. There are two ways the oil market may evolve in 2006: -- Weaker Market. In the aftermath of Hurricanes Katrina and Rita, oil prices fell by around $10 per barrel. Since the hurricanes, Organization for Economic Cooperation and Development (OECD) commercial stocks of crude and products are now at the higher end of the figure during the last five years. Combined with the threat of high oil prices on demand for oil, the market could move into an oversupply situation unless Organization for the Petroleum Exporting Countries (OPEC) takes action soon. -- Tighter Market. However, falling oil prices are a normal market reaction after hurricanes, as happened following Hurricane Ivan in 2004. The anticipation of hurricanes typically pushes prices above that justified by actual supply and demand balances. Market signals are pointing to tighter rather than weaker market conditions. On the demand side, there is so far little sign of any response to high prices, though the International Energy Agency (IEA) and others have been lowering their demand forecasts for both 2005 and 2006. Demand strength has been largely driven by economic growth--forecast at 3% for 2006--which shows few signs of slowing: -- OPEC. OPEC countries are showing exceptionally strong demand for oil, fueled by the sharp increase in oil revenue. -- China. In China, during the first half of the year, the government tried to ration demand. Initially, demand stagnated but, since September, it has picked up again and China may add 500,000 barrels per day (b/d) this year. -- United States. Earlier numbers suggesting lower demand in October appear to have been misleading; unsurprisingly since three-quarters of U.S. consumption consists of light products that are unresponsive to higher prices in the short term. Also, where dual firing capability exists, exceptionally high natural gas prices have helped boost oil demand. Oil demand is also affected by winter weather. If the current forecasts of an exceptionally cold winter in the Northern Hemisphere prove to be correct, this could significantly increase demand. On the supply side, both non-OPEC and OPEC may disappoint in terms of additions to capacity and supply: 1. Non-OPEC. Non-OPEC supply is being revised downward, as anticipated projects face increasing delays due to constrained capacity in the service industry and the aftermath of the hurricanes: OECD. Production is expected to decline by 850, 000 b/d in mature OECD economies this year. Russia. Russia is a cause for concern. Political uncertainty, inflation and rouble appreciation all increase costs and reduce profitability, inhibiting production growth and discouraging further investment. While there are signs of greater resources being invested in upstream activities and the service industry globally, the long lead time on projects means these will not bear fruit for a number of years. 2. OPEC. OPEC countries are currently producing around 30 million b/d, although the official quota is only 28 million b/d: Spare Capacity. The IEA estimates OPEC capacity of 32.1 million b/d at the end of 2005, while the U.S. Energy Information Administration puts the surplus in October at only 1 to 1.5 million b/d. Saudi Arabia has promised to meet shortfalls in crude supply, but refused to discount the price of its heavy sour crude, leading to few takers. It is unlikely that significant extra capacity will emerge outside of Saudi Arabia, though OPEC is expected to increase its natural gas liquids production by some 350, 000 b/d. 2006 Projections. Expectations of increased supply vary between 700,000 b/d and 1 million b/d by the end of 2006. This will largely consist of light sweet crude, which may alleviate some of the constraints facing refineries. Refining Shortage. A shortage of upgrading refinery capacity also remains a problem. This was aggravated by the hurricanes pushing up the price of light sweet crude. Unless gross domestic product growth collapses, the market looks as though it will remain tight throughout 2006. The market is still vulnerable to the threat of losing another major exporter through, for instance, another natural disaster. In such circumstances, a large price spike could be expected. If any market weakness does emerge, OPEC is likely to step in to protect the price. Even if the market weakens, OPEC is well placed to defend the price, while any potential shock to the market will lead to a price spike. Oil markets will probably remain tight during 2006 and prices are likely to continue around their current levels. Risks are on the upside rather than the downside. To read an extended version of this article log on to Oxford Analytica's Web site. Oxford Analytica is an independent strategic consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information please visit www.oxan.com, and to find out how to subscribe to the firm's Daily Brief Service, click here.

Saturday, December 03, 2005

SOB!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! this phantom wealth printing press seems to NEVER STOP!!!!!!!!! in front of surging assets.......since 2000 top there has been and not even since FED began raising FED funds.....ANY real tightening or restraint.

The FEd has engineered the destruction of our economy and monetary value.

About Me

PROFILE FOR MY 1 SOURCE BLOG:
We have over 30 years of experience and the best resources available to bring you unequaled value and customer service. We look forward to helping you with your next project with our "Creative Office Solutions"
#2 PROFILE FOR MY MARKET "HOBBY" BLOG
I have been writing about stocks and the market since the late 90's. My record of calling the last 2 , now maybe 3 bear markets stands. There is more to investing than just avoiding bear markets, but it sure doesn't hurt. I offer NO recommendation to buy or sell equities or trade any vehicle...I just offer my opinion for what it's worth. Consult with your financial advisor before taking any actions. this financial blog is for amusement only.